Mgic Investment Corp Q4 FY2024 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q4 2024 MGIC Investment Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Dianna Higgins, Head of Investor Relations. Ma'am, please begin.

Thank you, Howard. Good morning, and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the fourth quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer and Chief Risk Officer. Our press release, which contains MGIC's fourth quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, includes additional information about our quarterly results that we will refer to during the call today. It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable. As a reminder, from time to time we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about all the factors that could cause actual results to differ materially from those discussed on the call today are contained in our Form 8-K that was also filed yesterday. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. No one should rely on the fact that such guidance or forward-looking statements are current at any other time than the time of this call or the issuance of our 8-K. With that, I now have the pleasure to turn the call over to Tim.

Thank you, Dianna. And good morning, everyone. We ended the year on a high note with solid fourth quarter financial results, capping another successful year. We consistently generated mid-teen returns on equity while returning meaningful capital to our shareholders. Our business strategies and the strength of our business model allow us to be successful in varying economic environments. Consistent with the last few years, our 2024 financial results benefited from favorable credit trends and a disciplined approach to risk and capital management. Now a few financial highlights. In the quarter, we earned net income of $185 million and produced an annualized 14% return on equity. For the full year, we earned net income of $763 million compared to $730 million in the prior year. Insurance in force at the end of the quarter stood at more than $295 billion, up slightly from the prior quarter. The overall credit quality of our insurance portfolio remains solid with an average FICO of 747 at origination. Annual persistency ended the quarter at 85%, remaining relatively flat during the year consistent with what we had expected at the start of the year. We wrote $16 billion in new insurance in the fourth quarter and $56 billion of new insurance for the full year, up 21% from the prior year. We remain focused on maintaining a strong and balanced insurance portfolio. To date, we have not seen a material change in the credit performance of our portfolio and early payment defaults remain at a very low level, which we believe is a good indicator of near-term credit performance. The strength and flexibility of our capital position during the year supported $750 million in dividends from MGIC to the holding company. We also returned meaningful capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends for a total of approximately $700 million. This represents a 92% payout ratio of this year's net income. We expect share repurchases will remain our primary means of returning capital to shareholders while at the same time continuing to pay a quarterly common stock dividend. As discussed through the year, our approach to capital management remains dynamic with financial strength and flexibility as the cornerstones of our strategy. As part of our capital management, we regularly assess capital levels at both the operating company and holding company considering the current and expected environment to position ourselves for success across varied scenarios, an approach that has consistently served our stakeholders well. While we prioritize prudent growth over capital return, opportunities for growing our insurance in force over the last two years have been constrained due to the size of the market. During that same time, operating results and credit performance have been strong leading to higher payout ratios. If credit performance remains strong and our risk profile is stable or improving, I would expect capital levels at MGIC and the holding company to remain above target and payout ratios to remain elevated. Our well-established reinsurance program, which includes the use of forward commitment quota share agreements and excess of loss agreements executed in either the traditional or ILN market, remains a key component of our risk and capital management strategies. In addition to reducing the volatility of losses in stress scenarios, our reinsurance agreements provide capital diversification and flexibility at attractive costs and reduced our PMIERs required assets by $2.2 million or approximately 40% at the end of the fourth quarter. Shifting more broadly to the housing market. Despite some lingering uncertainty, it remains resilient, supported by favorable supply-demand dynamics with a generally positive economic outlook. Consensus forecasts projected the PMI market in 2025 will be relatively similar in size to 2024 and mortgage rates remaining elevated, which leads us to expect another year of high persistency. Additionally, recent forecasts indicate moderating growth in home prices, improving housing inventory, and continued pent-up demand along with favorable demographics, which we believe points to the continued resiliency of the housing market and the MI industry. With that, let me turn it over to Nathan to get into more details on our financial results and capital management activities for the quarter.

Thanks, Tim. And good morning. As Tim mentioned, we had another quarter of solid financial results. We earned net income of $0.72 per diluted share compared to $0.66 during the fourth quarter last year. For the full year, we earned net income of $2.89 per diluted share compared to $2.49 per diluted share last year. Our reestimation of ultimate losses on prior delinquencies resulted in $54 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2023 and early 2024. Cure rates on those delinquency notices continue to exceed our expectations and therefore, we have made favorable adjustments to our ultimate loss expectations. It is still too early to determine the full impact of Hurricane Helene and Milton on our new notices and our delinquency rate; to date, we estimate the impact has been modest with approximately 700 new notices received in the fourth quarter that are likely a result of the hurricanes. We adjusted our initial claim rate for new notices received in the fourth quarter from 7.5% in prior quarters to 7.3% this quarter to reflect the expected increased cure rates from the hurricane-related delinquencies. In the fourth quarter, our account-based delinquency rate increased by 16 basis points to 2.4%, which is consistent with the seasonal trends we have been discussing and includes a 6 basis point impact from the hurricane-related delinquencies I just mentioned. While the level of new notices and our delinquency rate have increased relative to recent years, they remain low by historical standards. We continue to expect that the level of new delinquency notices may increase modestly due to the large 2020 through 2022 book years being in what are historically higher loss emergence years. The in-force premium yield was 38.6 basis points in the quarter and remained relatively flat during the year consistent with what we expected at the start of the year. Given expectations of another year with high persistency and a similar MI market to 2024, we expect the in-force premium yield to remain relatively flat again in 2025. Our solid operating results, together with our strong balance sheet, enabled us to grow book value per share to $20.82, up 12% compared to a year ago while returning $700 million of capital to shareholders through dividends and share repurchases and reducing the outstanding shares by approximately 9%. The book yield on the investment portfolio was 3.8% at the end of the fourth quarter, up 20 basis points from a year ago and flat quarter-over-quarter as the yield on cash and cash equivalents declined offsetting improvements from reinvestment. Net investment income was $61 million in the quarter, down $1 million sequentially and up $3 million from the fourth quarter last year. During the fourth quarter, increases in yields across the treasury curve caused fixed-income prices to decline, resulting in the unrealized loss position on our investment portfolio increasing by $129 million. Our ongoing focus on expense management and operational efficiency continues to pay off. Operating expenses in the quarter were $49 million, down from $55 million in the fourth quarter last year. For the full year, expenses were $218 million, down $19 million from 2023 and towards the lower end of the $215 million to $225 million range we shared throughout the year. For 2025, we expect operating expenses will be lower again to a range of $195 million to $205 million. Turning to our capital management activities in the fourth quarter. We continued to allocate excess capital to share repurchases totaling 7.8 million shares of common stock for $193 million and paid a quarterly common stock dividend of $33 million. And as previously announced, in the quarter, we paid a $400 million dividend from MGIC to the holding company. The dividend from MGIC to the holding company reflected capital levels at MGIC that continue to be above our target. We continued our share repurchase program into 2025 and in January, we repurchased an additional 3.5 million shares of common stock for a total of $85 million. Our share repurchase activity continues to reflect our capital strength, financial results, and share price levels that we believe are attractive to generate long-term value for our shareholders. As of January 31st, we had $372 million remaining on our current share repurchase authorization. Also in January, the Board authorized a $0.13 per share common stock dividend to be paid on March 5th. Consistent with our overall reinsurance strategy to prioritize coverage on the most recent book year vintages and future NIW, as previously announced in the fourth quarter, we further bolstered our reinsurance program with a multiyear 40% quota share transaction with a panel of highly rated reinsurers that will cover most of our policies written in 2025 and 2026. Also, rather than canceling the quota share treaties covering our 2021 NIW, we amended terms with certain participants from the existing reinsurance panel that effectively reduces the quota share seed rate from 30% to 26%, achieving approximately a 50% reduction in the ongoing costs.

Thanks, Nathan. A few extra comments before we open up to questions. We see significant value in the role that mortgage insurance plays in the housing finance system. We look forward to working with Bill Pulte, who has been recently nominated by President Trump to be the next director of the FHFA. We continue to work with the FHFA, the GSEs, and other industry key stakeholders to responsibly serve low down payment borrowers while advocating for the increased use of private MI in order to protect the taxpayer from mortgage credit risk and to help shape the future of the housing finance system. In closing, we had a great year successfully executing our business strategies and returning meaningful capital to our shareholders. I am confident in our leadership and our position in the market, and believe that our capital strength and flexibility position us to continue to execute and deliver on our business strategies in 2025 and beyond to create value that benefits all of our stakeholders. With that, operator, let's take questions.

Our first question or comment comes from the line of Terry Ma from Barclays.

So you touched on the new notice claim rate coming down and that was hurricane-related, but your new notice severity also ticked up a little bit. Can you maybe just talk about that and what's kind of driving that?

It's really a function of just higher exposures on the new delinquencies that we're receiving compared to what we would have seen in prior quarters. Some of that is a result of receiving more new notices from the 2022 through 2024 vintages, compared to prior quarters, which have higher loan amounts and higher exposures. But we're still targeting the same severity to exposure ratio that we have in the past; it's just ticking up due to actual exposures increasing largely due to the mix of the new notices we're receiving.

And then maybe just on the OpEx guide. Can you, I guess, talk about the drivers of that OpEx kind of going lower and then maybe just any more color on how much lower OpEx can go longer term?

I believe the results in the fourth quarter reflect the cumulative impact of all the changes we've implemented over the past couple of years. Regarding the guidance range for next year, which is around $200 million, we were already operating at that level in the fourth quarter. This is primarily a result of our ongoing efforts to align our resources with customer needs and demands. It's something we've consistently focused on and will continue to prioritize. While I don’t expect to provide guidance beyond 2025, I can confidently say that I don't believe 2025 will represent our lowest achievable level.

Our next question or comment comes from the line of Mihir Bhatia from Bank of America.

Maybe to start, I just wanted to touch on GSE reform privatization; it's been in the news lately. Maybe just talk about some of the puts and takes for MTG in particular that would happen if GSEs were to be released?

Mihir, it's a question that's top of mind, obviously, and there's a lot of different paths that can take. I think when we sit back and look at it, there's a lot of things that can happen as they think about trying to release the GSEs out of conservatorship if you consider them wanting to shrink that footprint to make it easier, which could have an impact, obviously, on the amount of volume that can flow to us. You could also think of it in terms of trying to analyze the amount of volume that they can do versus FHA, and probably a lot of dialogue will be had there. We think there's a really good case to be made that it makes more sense from a taxpayer perspective for volume to flow through the GSEs as opposed to FHA, which would benefit us. So there's a lot on the table. I think the one thing that we think is important when you talk about GSEs and coming out of conservatorship, privatization whatever you want to call it, is that the right guardrails are in place and that you think about how the market will function in the long run. I think it's safe to say that we always want to be thoughtful about the role that private credit and mortgage insurance can play in providing a safety valve to the taxpayers as far as not having the GSEs take that credit risk. We think that has been true for decades and we think that will be true in the future as well. So I think we'll have a seat at the table in those discussions. But I don't think we're rooting one way or the other as much as making sure that the right thought processes are going into this process and that the right guardrails are in place no matter where it ends up.

And then maybe just on the claim rate, I appreciate you said it ticked lower this quarter just because of the hurricane delinquencies. I guess we've had an extended period of reserve releases. So maybe just talk a little bit about what you need to see happening for you to be convinced that the claim rate, the initial claim rate, should be a lower number than the 7-ish 7.5% that you've been at the last few quarters?

I think the way that we look at it is new delinquencies that we received in the quarter, there's a wide range of possible outcomes that those will experience in the future given the current economic environment. It is true that the actual economic environment for mortgage credit has been very good over the last few years. So the notices that have come in have been on a very favorable path and have resolved more favorably than we initially expected, leading to continued reserve releases on prior delinquencies. I think if you consider what it would take to meaningfully reduce the new notice claim rate in the future, I think we would have to be fairly convinced that the future economic environment was going to be as favorable as the recent past for unemployment, home prices, and other factors. And so I think the future economic environment is always a lot more uncertain than what's happened in the past. So I think we're really comfortable with where we sit and that it represents a relatively low new notice claim rate historically. Prior to the last five or six years, we would have said that anything below 10% would have been exceptional credit performance. We've been operating well below that for some time now. But I think given the range of possible outcomes for new notices being quite wide still, we feel really comfortable with where we are on the new notice claim rate at least in the near term.

My last question is about the normalized delinquency rate. We're trying to understand that, since you've mentioned being in a favorable environment, you likely don't underwrite based on that. What would be the more normalized delinquency or claim rate that you are underwiting to? Can you provide some insight on this? What would be considered normal credit costs for mortgage insurance?

I would think about it less in terms of what that turns into a delinquency rate. When you consider it, it becomes largely a function of persistency and how long books are lasting and on your in-force book, what's the relative concentration of recent writings versus older writings. But I think what we've said consistently over time is that we think that kind of more through the cycle underwriting type loss ratios would be in the range of about 20 to 40 over time, and we've been operating in zero or negative loss territory for the last several years. So the underwriting expectations are quite a bit worse than what we've been experiencing over the last five years or so.

Our next question or comment comes from the line of Bose George from KBW.

Actually, I was looking at the debt-to-income trend. In 2024, it looks like it's been higher than it's been for quite a while and higher than pre-COVID levels. Is that a reflection of affordability? Can you just talk about that and other underwriting offsets to that?

Bose, just to clarify, you're talking about the debt-to-income ratios.

Yes, just the debt-to-income ratios. I was looking at the trend.

I do think it's really just a matter of affordability. When you think about how much home prices have gone up, but on top of that, interest rates have risen. When you look at the ability of someone to qualify, having to stretch those debt-to-income ratios has been something that has been very true for the last couple of years, especially following the rise in interest rates. I think it's safe to say that the other credit characteristics have remained relatively stable and favorable, so that's having one additional risk characteristic that we keep a close eye on. Generally, we've felt comfortable that we can still charge a premium related to that risk as well. I feel pretty comfortable about the risk-return relative to that profile. But it is something we need to be thoughtful about, ensuring that individuals have other good credit characteristics alongside their credit profile. They need to have a good FICO score and good employment history. Those factors are important to ensure that someone can be successful when they actually purchase a home and are able to stay in the home.

Just to maybe add on, Bose. If you look at the recent history, the third quarter and fourth quarter of 2022, we saw larger increases in the higher DTI segment, which was the same period that mortgage rates were rising. It has been relatively flat over the last couple of years. In the supplemental materials that we published, we also discuss required capital on new business, and that has actually ticked down a bit. Now, DTI below 50 is not a variable in PMIERs, but I think risk-based pricing and the ability to price layered risk pretty discretely in a way that we couldn't with rate cards has also been a method we've used to address this new risk factor in the market by offsetting it with better quality and other factors. So I think it is a function of higher interest rates. We would expect if rates were to go back to 3% or 4%, that the level of high DTI would also come down. But it feels like something we can address directly in our credit policy and pricing approach.

And then next, just going back to the claim rate question. The books you mentioned from '23 and '24, they've cured. What was sort of the ultimate claim rate on some of that stuff?

Just to clarify, when we talk about the book years, it's more about when we receive the new notices. So we received new notices from many different book years in 2023. We think about them as a group and track them over time to establish ultimate claim rates. Those are not fully developed yet, so there's not a new finalized answer on what the ultimate claim rate is. But for many of those new notice quarters today, if I look at them, our new ultimate claim rate expectations are somewhere in the range of 3% to 5% for those compared to approximately 7.5% initially. Some of our more fully developed notice quarters from 2021 or 2022 have seen ultimate claim rates in the 1% to 3% range. So it's been an exceptionally favorable environment for mortgage credit coming out of the peak COVID dislocation in the second quarter of 2020. But early results for new notices are showing similar resolution patterns as we track them after three months, six months, and nine months. So it does still feel like new notices are experiencing a favorable environment, leading to continued favorable reserve development.

Our next question or comment comes from the line of Douglas Harter from UBS.

I was hoping you could talk about the pricing environment for NIW. In the quarter, we saw competitive dynamics.

Again, we don't talk a lot about pricing dynamics, as it tends to be too close to something we feel is proprietary. I think it's fair to say that the risk-return continues to be very favorable, and I probably would have said that for the better part of the last year, quite frankly. So when we look at deploying capital and what resulted in our Q4 NIW, I think our use and return expectations were very similar to what we've been experiencing most recently, and that's a good environment for us.

Our next question or comment comes from the line of Scott Heleniak from RBC Capital Markets.

Just wondering if you could expand on the last comment about the NIW growth, which was pretty significant. It sounds like you're pretty optimistic about the return potential in that business. But is there any particular geography or any other detail you can share on why you're feeling so good about the business you're putting on the books in Q4 versus the past year?

I'd say, just for clarity, I feel good about all the business we've put on for the last year. I believe if you consider different geographies or risk factors, we haven't taken a significantly different approach to addressing the market, and our approach to returns and pricing has remained consistent. I think the fourth quarter feels more like a continuation of the trends we had seen earlier in the year. One thing to mention is there may have been slightly more refinance volume in our Q4 volume, resulting from that small dip when interest rates came down, which was really in Q3 of last year. But from a capital deployment and return profile, it feels consistent with our previous trends. That would be the only factor I could point out regarding the Q4 volume.

And then the only other question I had was on the operating expense guidance for 2025. But was there anything one-time in that expense ratio that ticked down about 400 basis points or so? Is there anything that you wouldn’t expect to repeat in that number for the fourth quarter?

There's some natural variability in our expenses on a quarterly basis, so if you look at it on a rolling 12-month basis, it's a lot smoother over time. There's a little seasonal variability, as the first quarter is typically higher in expenses, including year-end compensation-related items and payroll taxes among others. We don't experience every quarter as the same number, but in general, we're operating at that level today that we've given as guidance for 2025. There are a few smaller items, but nothing significant or nonrecurring to call out in the fourth quarter; it primarily reflects the cumulative impact of all of our changes.

Our next question or comment comes from the line of Geoffrey Dunn from Dowling & Partners.

I wanted to understand the 7.3% claim assumption a bit better. Is the way to think of it that the hurricane notices were provisioned at a lower rate and the non-hurricane notices were still at 7.5%, with the implication being when the hurricane notices go away, we're back to 7.5% again?

I think that's how we thought about it. I think that's the right way to think about it.

And then with respect to expenses, can you talk a little bit about what levers you're pulling to achieve the guidance? It looks like if you strip out the ceding commissions, you're close to a 10% reduction year-over-year. What types of things are you doing to achieve that result and potentially getting an even better result beyond '25?

The changes really stem from what we started making in 2022. Our use of outside services is down quite a bit. The number of coworkers we have is down about 10-12% in the year, and we’ve experienced many retirements over the last three years. We’ve been able to reposition how we conduct our work in certain departments, including how we handle customer interactions, underwriting loans, IT, and even back-office functions like finance and risk management. There's not a single or two major changes we've made; rather, this has been a company-wide effort, and we have achieved these results. We also recognize, compared to the rest of the industry, that we still have room to improve.

And if I think back several years with respect to tech spend, I think you ramped it up trying to accelerate improvements. How do we think about your tech spend these days relative to three years ago?

Geoeff, I think the way to view it is that we are continuing to invest in the platform. However, it's fair to say that some of the investments we've been making since '21 and into '22 have started to pay dividends, allowing us to reduce our reliance on external services. As Nathan mentioned, we probably had more reliance on outside services to help with tech expenditures during that period, but now we're starting to see savings from those previous investments. It's essential to continue investing in the platform while generating additional savings through technology enablement. We're focused on claims values and ensuring we're delivering effectively. Our recent tech spending was crucial after COVID and is beginning to yield results. The question remains how many additional savings we can realize going forward.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Sure. Thank you, Howard. I want to thank everyone for your interest in MGIC. We will be participating in the UBS and Bank of America Financial Services Conferences next week. Have a great rest of your week. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.